American consumers are still spending, but for how much longer?
The National Retail Federation (NRF) is forecasting a record-shattering holiday this year. The retail trade group expects holiday retail sales will grow 8.5 percent to 10.5 percent for a projected total spend of $843.4 billion to $859 billion.
A Wells Fargo economics report Friday found that September’s personal spending report documented a 0.6 percent monthly pickup, a sign that indicates “there is still some spring in the step of the U.S. consumer heading into the final stretch of the year.” The U.S. Commerce Department’s third quarter gross domestic product (GDP), adjusted for inflation, showed growth of 0.5 percent, representing the weakest growth period since the economy began recovering from the pandemic in the spring.
Tim Quinlan and Shannon Seery, economists at the investment bank, said that although the GDP report showed only “tepid consumer spending growth,” personal income and spending data suggests a shift to services spending came at the cost of a sharp slowdown in goods spending. A remaining headwind is consumer price inflation. The income side of the report showed a 1.0 percent monthly decline, the result of governmental stimulus that ran out last month.
Perhaps more important, the personal saving rate slid to 7.5 percent, just slightly ahead of the 7.3 percent pre-pandemic rate in September 2019. The savings rate hit a high of 33.8 percent in April 2020, one month after the start of Covid-19. Consumers appear to be in a better position because they’ve been sitting on over $2 trillion in excess savings during the pandemic. The savings rate indicates that consumers are in a better financial position post-pandemic and have the wherewithal to spend. However, the Wells Fargo economists pointed out that September marked the first month that consumers drew down their savings.
And for October, the University of Michigan’s Index of Consumer Sentiment gained 0.3 percent index points, just 0.1 above the average in the past two months, and only 0.1 below the April 2020 low.
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“The positive impact of higher income expectations and the receding coronavirus has been offset by higher rates of inflation and falling confidence in government economic policies,” Richard Curtin, University of Michigan’s Surveys of Consumers chief economist, said. “Consumers not only anticipated the highest year-ahead inflation rate since 2008 in the October survey, consumers also expressed greater uncertainty about the year-ahead inflation rate than anytime in nearly forty years.”
Just one in five households documented a decline in living standard as a result of inflation, largely concentrated among older and financially challenged households, Curtis said.
“Consumers’ recognition of high and rising prices is near universal, so too is their desire to reestablish spending for a more traditional holiday season. People understand that the origin of inflation has been in the upheavals in supply lines and labor markets,” Curtis said.
But he also said that acceptance of higher prices has been due to excess savings and to President Biden’s social support programs. And he cautioned that a tipping point will be reached when the inflation rate rises so high that consumers’ incomes won’t be able to keep pace.
“In the past inflationary era, one recession was insufficient to realign expectations; it required a series of boom-bust cycles, until [Federal Reserve chairman Paul] Volcker finally defeated inflation by raising interest rates to record levels,” Curtis said.
Since consumers still have a savings cushion to rely on, and because they’ve started to tap into savings, spending will need to be tracked over the next few months to get a better read on their continued willingness to spend.